read through the market profile handbook yesterday (available form the CME Group site - see previous post for link) and there are 2 statements that really stuck out. Quite obvious actually, but none the less they hit me.
1. Price auctions UP to STOP the BUYING
2. Price auctions DOWN to STOP the SELLING
those familiar with VSA should not be new to this concept, but still it struck me.
from the chart, we see responsive buying at the bottom of value area 1 and responsive selling at the top for most of the week of Jan 16 until initiative buying was found at the top of value to move price up and start establishing value area 2.
Value area 2 has been in development for 2 weeks, and if you merge the last 2 weeks of market structure (value area 2 & 3 combined), you basically have a "b" shape, with more activity in the last 2 weeks in the lower part of the structure. The fair value of EU during the last 2 weeks is roughly 1.3690 - established by having the most activity at that price in the combined structure, and then the value area is imbalanced lower with more volume in below the fair value than above.
So, over the last 2 weeks price was pushed down inside the merged value area and stayed in the value area. According to #2 above, price auctions down to stop the selling, and according to the book, the value area imbalance indicates where the long term activity is vs the short term activity. The long term activity will buy above the current fair price because higher value is expected and only trades small % inside the value area, while the short term activity will buy below fair value in order to get a better bargain in the short term. So according to market profile, this 'b' structure looks like absorption, implying higher prices to come. In fact if you look at the monthly structure for December 2010, it has a similar 'b' shape to it.
Needless to say EU may still get a shakeout and attempt to move into value area 1, but Friday was the 3rd time that was rejected. It will be interesting to see where EU opens in Asia today as we closed on Friday below last week's POC of 1.3620 but inside the 2-week value area. If EU opens in the value area and holds we should be looking for responsive longs, but if the value area doesn't hold we would be looking for initiative shorts.
1. Price auctions UP to STOP the BUYING
2. Price auctions DOWN to STOP the SELLING
those familiar with VSA should not be new to this concept, but still it struck me.
from the chart, we see responsive buying at the bottom of value area 1 and responsive selling at the top for most of the week of Jan 16 until initiative buying was found at the top of value to move price up and start establishing value area 2.
Value area 2 has been in development for 2 weeks, and if you merge the last 2 weeks of market structure (value area 2 & 3 combined), you basically have a "b" shape, with more activity in the last 2 weeks in the lower part of the structure. The fair value of EU during the last 2 weeks is roughly 1.3690 - established by having the most activity at that price in the combined structure, and then the value area is imbalanced lower with more volume in below the fair value than above.
So, over the last 2 weeks price was pushed down inside the merged value area and stayed in the value area. According to #2 above, price auctions down to stop the selling, and according to the book, the value area imbalance indicates where the long term activity is vs the short term activity. The long term activity will buy above the current fair price because higher value is expected and only trades small % inside the value area, while the short term activity will buy below fair value in order to get a better bargain in the short term. So according to market profile, this 'b' structure looks like absorption, implying higher prices to come. In fact if you look at the monthly structure for December 2010, it has a similar 'b' shape to it.
Needless to say EU may still get a shakeout and attempt to move into value area 1, but Friday was the 3rd time that was rejected. It will be interesting to see where EU opens in Asia today as we closed on Friday below last week's POC of 1.3620 but inside the 2-week value area. If EU opens in the value area and holds we should be looking for responsive longs, but if the value area doesn't hold we would be looking for initiative shorts.
Change is the only constant